US Federal Reserve’s Inflation Strategy Expected to Boost BTC Performance


  • The Fed announced its new “average inflation targeting” strategy to boost inflation
  • Zero interest rates likely to remain for a prolonged period, which will ultimately benefit BTC
  • Following MicroStrategy’s $250 million investment in BTC, more individuals and corporations are expected to look for alternative investment opportunities for greater returns

The U.S. Federal Reserve (Fed) Chair, Jerome Powell, announced new plans that won’t just allow inflation to run above the initially targeted two percent rate, but encourage it. Following a year-long policy review, the Fed has outlined its commitments to a strategy it calls “average inflation targeting”. 

As part of its new strategy, the Fed will remain committed to retaining low interest rates as part of its more relaxed attitude to pursue inflation targets above the central bank’s usual target of two percent, so long as inflation also increases. Given that inflation has been below this level for some time, if the central bank was to adopt an average inflation target, it would need to push that figure beyond two percent for some time. 

Image credit: Wall Street Journal

The idea is that above-target inflation could potentially offset periods where consumer price increases were previously below the mark, which has been the case for the better part of the past two decades. Even with increased inflation targets, if the Fed can provide assurances that interest rates will remain low, it could help instill confidence in investors of a faster economic recovery.

Overall, it’s a move that is expected to have a subtle yet profound shift in monetary policy for the world’s largest economy.

Trouble with the curve

The 10-year expected annual inflation, more commonly referred to as the “break-even rate”, is a market-based gauge for expected annual inflation over the next decade. The graph below highlights how inflation has rebounded back to 1.66 percent, from as low as 0.47 percent in March 2020, during the peak of the COVID-19 pandemic. Rising inflation expectations are, in part, indicative of the market beginning to price in the Fed’s shift. Even though the Fed first announced a two percent inflation target in 2012, it has consistently fallen short, averaging just 1.4 percent since the target’s introduction. 

Source: Bloomberg

In response to its own shortcomings and other external factors such as the impact of COVID-19 on the U.S. economy, the Fed has already pumped almost $3 trillion worth of new money into financial markets this year alone, up by 20 percent. This has pushed its total assets to around $7 trillion. Though, the result of this pump could potentially hurt the U.S. currency’s purchasing power. 

 Source: Federal Reserve Bank of St. Louis

With the aim of trying to bolster business and stimulate the market, such a drastic rise in U.S. money supply won’t necessarily translate to higher inflation, or at least not in the short-term. After all, if businesses aren’t inclined to spend, the vast money supply would do little to ignite the fire needed to restart the economy. 

Bitcoin to gain

The other issue that the Fed needs to consider is, if interest rates continue to remain at zero (or relatively close to zero) for a prolonged period of time, cash management is going to become a problem: not only for individuals but also for corporations. One such corporation that has “taken matters into its own hands” is Nasdaq-listed MicroStrategy. The company recently announced that it had invested $250 million (50% of its cash reserve) into BTC as its primary treasury reserve—a first from a U.S. publicly-listed company. This type of investment is a clear indicator that the tech giant believes that BTC will be a viable option to hedge the company’s portfolio against inflation, and potentially more valuable than the U.S. dollar in the not-so-distant future. 

Following MicroStrategy’s announcement, international software company Snappa announced that it had allocated 40% of its cash reserves in BTC. Additionally, popular Canadian restaurant chain Tahini’s also announced that it had converted all of its cash reserves into BTC. MicroStrategy’s investment has instilled greater confidence in the market and could prompt others to follow suit. 

The Fed’s plan to drive inflation and hold interest rates at zero for the foreseeable future is also driving real-world treasury yields below zero. The continued over-printing of money is likely to have a significant knock-on effect, such as further depreciating the real-world value of the U.S. dollar, which could force investors to try and find healthy returns elsewhere. Some may look to invest in gold, others in real-estate, though it’s expected that more companies will follow in the footsteps of MicroStrategy and look towards cryptocurrencies. Given that BTC is not routed to any specific country, it will be insulated from inflation and could be propelled higher with increased investments.